Foreign exposure boost for savers
While the South African economy shows signs of recovery, local market volatility remains, which can make achieving robust returns challenging. Asset managers therefore broadly welcomed the increases to foreign exposure allocations for pension funds announced by the Financial Services Board (FSB).
“Regulation 28 funds can now invest up to 40% internationally,” explains Maurice Madiba, CEO of Cloud Atlas Investing. “Allocations can now comprise a maximum of 30% in non-African investments and 10% in Africa, excluding SA.”
Madiba believes the doubling of the foreign exposure allocation into Africa offers a significant opportunity, as certain economies delivered superior returns last year.
“Africa ex-SA funds returned on average 33.8% in US dollar terms in 2017, thanks largely to structural reforms within Africa’s major economies and a stabilising political environment.”
Says Bheki Mkhize, CEO of FNB Wealth and Investment Solutions: “These new limits offer asset managers more diversification opportunities across companies and themes not available locally, as SA has a smaller and more concentrated opportunity set.”
While investing a portion of a client’s portfolio offshore has the potential to deliver a more attractive outcome in the long term, Mkhize says asset managers may hold off on immediately utilising the increased limits. “Global equity markets have had a good run over the past few years and most are looking expensive.”
A surge in offshore investments may also pose an additional risk to local savers if not correctly managed, says Rüdiger Naumann, portfolio manager at Investec Asset Management. “Offshore assets are often managed independently as standalone portfolios by third-party managers. This segregation of the onshore and offshore asset allocation and selection decision could create ‘conflict’ within an overall portfolio, resulting in a suboptimal risk-return outcome.”
This becomes an issue when positions or investment themes are doubled, and where a lack of control is created through the outsourcing of the offshore portion of the portfolio, he adds. “There are also cost implications as third-party offshore asset management could attract additional fees. While this might be countered with passive offshore strategies, these may not be the most effective use of limited offshore allowances.”
An inability to act timeously and in a coherent manner is another threat to maximising returns in a balanced portfolio.
“As SA is a small economy an investment manager may make substantial changes to the portfolio’s domestic portion due to changing global market conditions. Without timeous insights into what the offshore manager may be doing, potential returns could be mitigated by any counterintuitive positions he takes.”
The separation of the onshore and offshore investment decision-making process could therefore result in a portfolio with an incoherent risk and return profile.
“Ensuring domestic and global assets in a single portfolio are complementary will balance exposures and keep risk and return in harmony. This is the only solution to appropriately enhance diversification offshore and enhance risk-adjusted returns for investors.”